New GST compromise is not what the doctor ordered

Reform in bits and pieces seems to be our way of doing things. After do-it-yourself FDI in multi-brand retail, where each state can take a call by itself on whether or not to allow Walmart in, we now have a join-as-you-please-tax-as-you-like approach to the goods and services tax (GST).

The whole point of a unified GST is to have one single tax rate for the whole country, so that collecting the tax is easier, while also being self-reinforcing, with each buyer of an input/component getting a tax setoff on taxes already paid by his supplier/vendor.

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But under the deal now agreed between centre and states, we will neither have a single rate, nor even as GST that will be applicable to all states. There will be a floor rate, and small band of other rates. States can also walk in and out of GST. The broad contours of the deal and the implementation schedule may be announced in Budget2013.

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Sukumar Mukhopadhyay, a former member of the Central Board of Direct Taxes (CBDT), points out the confusion that lies ahead.

Writing in Business Standard, he says: “Let us see how this will work. If the floor rate is, say, 10 percent, the band may be nine, 10 and 11. So, it may be nine percent in West Bengal, 10 percent in Bihar, 11 in Uttar Pradesh, nine in Haryana and 11 in Punjab. If a train or truck starts from Kolkata towards Delhi and Amritsar, imagine how many different rates of services tax and goods tax (for cargo) it will encounter on its journey. Invoicing will be a nightmare and claiming input tax credit will be an even bigger nightmare than it is now. Currently at least, the service tax is only collected by the Centre yet the credit rules are still highly complicated. Imagine when states fix their own rates, how complicated the input duty credit system will become incongruity of it all.”

GST was once touted as the silver bullet for greater economic efficiency, tax buoyancy, lower corruption and smooth goods and services trading.

But the new hybrid GST may end up being neither fish nor fowl. It could become an unmitigated nightmare till all states sign up.

In order to give states autonomy to walk in and walk out, and also set their own rates, it is losing its best feature: simplicity. What we will get is not a simple and effective tax regime that is self-enforcing and easy to collect, but a hybrid that will be no better than what we have now. We will be giving up a known devil for an unknown one.

Is this any way to reform?